The Royal Bank of Scotland Plc v Chandra & Anor

Factual and Procedural Background

The bank initiated proceedings to enforce guarantees given by the defendants in respect of borrowings made by a jointly-owned company involved in a hotel development project. The bank sought judgment for the amount due under the guarantees and possession of the defendants' matrimonial home, which was charged to secure the guarantees. The case was transferred from the County Court to the High Court due to the defences raised.

The defendants, a married couple, had previously built and sold a successful nursing home business, using the proceeds to invest in a hotel development in Manchester through a subsidiary company. The company entered into loan agreements with the bank, secured by charges and personal guarantees from the defendants. The development faced increasing costs and disputes with the contractor, leading to the appointment of administrative receivers by the bank in 2003 due to funding difficulties and management concerns.

Following the receivers' appointment, a complex structure was established whereby a special purpose vehicle (SPV) was nominated to step into the building contract with the contractor, guaranteed by the bank, with the company acting as principal and indemnifying the SPV. The hotel was completed and sold in 2004, but the sale proceeds were insufficient to cover the outstanding indebtedness, leading to the bank's claim under the guarantees.

The defendants raised defences principally contesting the validity and effect of the post-receivership arrangements, alleging that the company was released from liability under the building contract and that the bank's imposition of further liabilities was a sham, a breach of equitable duty, or a prejudicial variation of the guaranteed arrangements. Mrs Chandra additionally raised a defence of undue influence in relation to the guarantees.

Legal Issues Presented

1. Whether the structure established post-receivership imposed valid liabilities on the company and, by extension, the defendants under the guarantees.
2. Whether the post-step-in lending constituted a sham or was unconscionable, thereby discharging the defendants from liability.
3. Whether the bank breached an equitable duty owed to the defendants as guarantors by the arrangements made after receivership.
4. Whether the post-step-in arrangements materially varied the underlying contracts to the defendants' prejudice, discharging them from further liability.
5. Whether the settlement with the contractor was procured by the bank's control or interference with the receivers, giving rise to a defence of negligence.
6. Whether Mrs Chandra's execution of the guarantees was procured by undue influence and/or misrepresentation by Mr Chandra, and whether the bank had notice of such undue influence.

Arguments of the Parties

Defendants' Arguments

• The post-step-in structure was a sham designed to impose liabilities on the company from which it was released, meaning the guarantees should not cover borrowings after receivership.
• The bank breached equitable duties by re-imposing liabilities on the company solely to benefit from security, prejudicing the defendants.
• The post-step-in lending materially varied the underlying contracts without defendants' consent, discharging them from liability for further advances.
• The settlement with the contractor was negligently agreed under the bank's control of the receivers, making the bank liable and reducing or extinguishing the defendants' guarantee liability.
• Mrs Chandra was unduly influenced by Mr Chandra to give the guarantees, with the bank on notice and failing to take protective steps, rendering the guarantees unenforceable against her.

Bank's Arguments

• The step-in provisions in the deed of warranty were mandatory, and the company remained liable for completion costs either under the building contract or as "expenses" secured by the debenture.
• The structure post-receivership was not a sham but a legitimate commercial arrangement, with the receivers acting independently and in good faith.
• The bank did not breach equitable duties; the further lending was within the scope of all monies guarantees and charges, and the receivers acted properly.
• The bank was not liable for the settlement with the contractor as the receivers acted independently without undue control or interference.
• The first guarantee was validly given without undue influence or misrepresentation, and the bank took sufficient steps to avoid notice of any undue influence.
• The second guarantee was procured by undue influence by Mr Chandra, but the bank was not on notice and took reasonable steps to obtain independent legal advice, so it remains enforceable.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed examination of the financing documents, the deed of warranty, and the post-receivership arrangements. It found that the step-in provisions were mandatory and that the company was not discharged from liability under the building contract but that the contract was effectively novated to the bank or its nominee. The company remained liable for completion costs either under the contract or as "expenses" secured by the debenture.

The court rejected the defendants' claim that the post-step-in structure was a sham, noting the receivers' independent exercise of powers and genuine intention to bind the company. It also rejected the equitable duty defence, finding no unconscionable conduct by the bank or receivers.

Regarding the defence of material variation, the court held that further lending was contemplated by the all monies guarantees and charges, and the defendants were not discharged by the post-step-in arrangements. The court distinguished the case from precedent where no further lending was contemplated.

On the issue of bank control over the receivers in settling with the contractor, the court found the receivers acted independently and that the bank did not interfere or control the settlement decision, rejecting the negligence defence.

On undue influence, the court applied the principles from Etridge, distinguishing between the two guarantees. It found that Mrs Chandra placed trust and confidence in Mr Chandra regarding financial decisions and that the first guarantee was not procured by undue influence or misrepresentation. The bank took sufficient protective steps for the first guarantee, including independent legal advice.

However, for the second guarantee, the court found that Mrs Chandra was unduly influenced by Mr Chandra due to the lack of meaningful opportunity to consider the guarantee, pressure applied during a rushed meeting, and inadequate legal advice. The bank failed to take the necessary steps to avoid notice of undue influence for this guarantee, rendering it unenforceable against Mrs Chandra.

Holding and Implications

The court allowed the bank's claim against the defendants except in relation to the second guarantee as against Mrs Chandra. Specifically, the second guarantee was set aside due to undue influence and the bank's failure to take protective steps. Mrs Chandra remains liable on the first guarantee, and Mr Chandra remains liable on both guarantees.

The bank is entitled to judgment for the amounts due under the first guarantee and the mortgage securing it, including an order for possession of the matrimonial home.

No broader precedent was established beyond the application of existing principles on sham transactions, equitable duties, contract variation, and undue influence. The decision clarifies the limits of bank protection in cases of undue influence and the significance of proper procedural safeguards when obtaining guarantees from spouses.